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Chuck Marohn puzzled a bit over housing costs over at Strong Towns last week, writing that “You can’t sustain increasing demand while also sustaining increasing prices and increasing supply.”

Would you pay $700/sq. ft. for this 2-bedroom alley house? Somebody did, paying 170% above its 2006 tax value. Sure, valuation growth like that isn’t sustainable, but what about our cities is?

You can if (1) demand grows just a bit faster than supply, or if (2) incomes are growing, or if (3) slightly more income can go towards housing — and certainly so if all three occur. Indeed, all three of these dynamics have sustained housing price inflation in gateway cities over the past generation.

This inflation has been politically possible because many existing residents (and thus voters) are sheltered from the resulting affordability crisis. Only a minority of people are exposed to housing affordability; most current residents are sheltered from price increases, having purchased or rented their housing at yesterday’s market prices. It’s pretty much only in-migrants who have to pay today’s housing prices, and since they’re migrants, they don’t vote. In-migrants are also a surprisingly small share of Americans: in any given year, fewer than 3% of Americans move across state or national borders.

1. Between job growth, smaller households, and natural growth, housing demand is increasing faster than population (and construction) in many metro areas. This has been the case in California for decades; the LAO’s 2015 paper estimates that since 1980 (my entire lifetime!), California has built 100,000 fewer units every year than it should, and yet (a) demand to live in California continues, although definitely abated; (b) prices have skyrocketed; (c) construction has added some new supply.

2. Median incomes nationally have been flat for the past generation, but macroeconomic shifts have led incomes in the richest gateway cities to soar (also see this Economist briefing). This is especially true at the top of the distribution, due to rising overall inequality. The minority of households that are exposed to high prices may very well be able to afford those prices in these cities, explain Gyourko, Mayer, and Sinai in their paper on ‘superstar cities’: “Recent movers into superstar cities are more likely to have high incomes and less likely to be poor, than recent movers into other cities… In short, residence in superstar cities and towns has become a luxury good. The cities’ increases in housing price appear to outstrip known productivity increases and the value of any additional amenities.”

Since only a small proportion of housing units trade hands each year (only 1-2% of households move into brand-new housing in any given year), “superstar cities” with rising incomes at the top and relatively few houses available see “new money” outbidding others for those few units, pulling prices up. Because house prices are based on comps, prices for other houses also rise. As Matlack and Vigdor write, “In tight housing markets, the poor do worse when the rich get richer.”

I know this seems insane, but income inequality has gotten so far out of hand that in many cities super-luxury housing is under-supplied, with tremendous consequences all the way down the housing ladder. There are over a thousand Bay Area households with million-dollar bank accounts for every single house that came on the market last year in Atherton, the choicest of Bay Area towns. Hence, house prices in Atherton have doubled in four years.*

3. Metro economies have evolved in lots of small ways to cope with higher housing prices at the margin. At first glance, “the poor will always be with us,” but in reality metro areas differ very substantially in terms of their economic makeup. Having moved from low-cost Chicago to high-cost DC, I’ve noticed that this slowly-accumulating, giant gift to high-cost-regions’ landlords has been cobbled together by squeezing a few dollars here and there from other sectors:
– Higher labor costs: the minimum wage here is about 15% higher, and high-labor-input services (like haircuts) cost substantially more here, because the staff earn more.
– A shift towards higher-wage work and reduced labor inputs (see #2 above). There are, of course, lots of well-paid jobs in DC; nearly half of households here earn over $100K. Many dual-income “power couples” who have no problem with the local cost of living. But there are surprisingly few on-site support staff for them, and instead there’s often off-site help. Even in labor-intensive industries like restaurants, on-site prep work can be minimized by relying on commissaries and distributors based in cheaper cities. (You can forget about Jacobsean “import substitution.”) Anecdotally, I’ve heard that employers are willing to make do with thinner staffing here than elsewhere.
– People work more; DC’s female labor force participation rate is 15% higher than Chicago’s.
– Housing itself can’t be substituted (everyone needs somewhere to live), but houses can be. People downgrade their locations or living standards, living in smaller or lower-quality housing units in less desirable neighborhoods than they otherwise would. They also “pay” for housing with long commutes, often from what are technically other metro areas.
– People borrow more. DC has more mortgages and higher student-loan bills than any other metro.
– People spend more on housing, and less on other goods and services. Brookings’ Natalie Holmes notes that the 20th-percentile unit in DC costs 48% of a 20th-percentile income, vs. 38% for a 20th-percentile individual in Denver.

Citizens are spending money on accommodation that they would readily divert to goods and services if their housing costs were lower… the money ‘trapped’ in the housing market runs to billions… Unleashing this spending would in turn boost business revenues and create more jobs. Assuming that businesses were to channel all additional revenue into employment, we estimate that Beijing could generate more than 400,000 new jobs, Mexico City more than 200,000, São Paulo more than 143,000, and Hong Kong nearly 148,000.

* Chuck’s follow-up post posits that property owners are speculating on upzoning. This line of reasoning is beloved by so-called “SF progressives,” who relish pinning the blame for everything upon evil, greedy developers and the obnoxious “kids these days” who inevitably fill their apartments. Yet this densification/speculation theory cannot explain the skyrocketing housing prices that are at the very epicenter of America’s metro affordable housing crisis — in places that have zero multifamily growth and zero transit investment, but LOTS of high-wage jobs, like Atherton, Menlo Park, and Palo Alto in Silicon Valley, or Chevy Chase in Maryland, or the Hamptons. Atherton is the most extreme example: the town banned all multifamily housing and sued to stop transit, and yet house prices have doubled in four years.

Perhaps, instead of transit-oriented speculation, exclusionary, single-family-only snob zoning has left supply and demand imbalanced. Believe it or not, the demand for $3M houses in Atherton vastly exceeds the supply of $3M houses, so the $3M houses have been bid up to become $6M houses. I know this seems insane, but there are over a thousand Bay Area households with million-dollar bank accounts for every single Atherton house that came on the market last year.

There are also many fashionable urban neighborhoods where housing prices have spiraled even while housing unit density is declining: the demand for mansions is so high that humble apartment buildings get demolished for glamorous single-family houses. (Once again, life imitates the Onion.) This was even the case in my onetime home of Bucktown in Chicago, where the ward boss infamously handed out spot rezonings upon “request”; in theory, these could have been used to add units, but in practice the McMansions just got fatter.

You can see the Capitol Dome from here. Photo by Eric Fidler, via Flickr

Yes, the McMillan Sand Filtration Site is one mile (from either end of the site) to the Red Line. It’s even 0.6 miles to the nearest express bus route (Georgia Avenue’s 79), and key network improvements are still in the planning stages. Yet from the point of view of someone who wants to reduce auto dependence (and the concomitant pollution, injury, and sprawl), what matters most is that MSFS is close to downtown, rather than close to Metro.

Transportation planning research has consistently shown that location relative to downtown and to other land uses is far more closely associated with the amount of driving than location relative to transit. Ewing and Cervero’s definitive 2010 meta-analysis (cited by 679 other scholarly articles) examined over 200 other studies, then combined the correlations found by 62 different studies:

Yes, it turns out that the number of miles that people drive is four-and-a-half times as closely correlated with the distance to downtown than with the distance to a transit stop. This strong relationship between driving and distance to downtown is borne out in local survey research by MWCOG/TPB. Note that whether an area has Metro access (like Largo or White Flint, vs. the Purple Line corridor) doesn’t actually seem to impact the number of drive-alone (SOV) trips.

Some suggest that development proposed for this site should instead go elsewhere. If the development is denied, those residents and employees and shoppers won’t just disappear, they’ll just go somewhere else. They won’t go to superior locations even closer to downtown and Metro (because those are so very plentiful!), but rather to far inferior locations. For instance, the life-sciences employers might choose an alternative location within our region that has already approved a similar mix of uses — such as Viva White Oak, Inova Fairfax, Great Seneca Science Corridor, and University Center in Ashburn, all of which are much further from both downtown and Metro.

This isn’t just the suburbs’ fault. Within the District, even more intensive development than what’s proposed at MSFS has already been given the go-ahead at locations such as the Armed Forces Retirement Home, Hecht Warehouse, and Buzzard Point. All of those sites are also inferior to MSFS from the standpoint of not just transit accessibility and distance to Metro Center, but also on all of the other factors shown to reduce VMT.

If the “Reasonable Development” types truly do care about reducing driving, I must have missed their years of caterwauling over the approval of all these other sites — not to mention the countless suburban developments that together pave over 100 acres of open space every single day in the Chesapeake Bay watershed. That’s why I give more credence to the people who do actually care about paving over the region, like the Piedmont Environmental Council — a/k/a the Coalition for Smarter Growth.

I’ve been taking a time series of photos of construction at the Wharf from two vantage points for several months now: from the Case Bridge (under the sign for D St.) and from Banneker Overlook (by the trash can).

By complete coincidence, I seem to have snapped photos on 22 July 2015 and 22 July 2016. In July 2015, excavation was wrapping up and the tower cranes were just arriving to start building back out of the hole. In July 2016, the hotel towers appear to be almost topped-off.

Banneker Overlook, July 2015. There are still pile drivers on the site to drill the foundation, but the first tower cranes had just arrived.

Banneker Overlook, July 2016. 950 Maine Avenue is front and center; below the trusses in the middle of the block will be a 6,000-seat venue, wrapped with two apartment towers.

Case Bridge, July 2015. Water-side construction of the piers was still taking place, and the excavation roads were still in use.

Case Bridge, July 2016

(This isn’t really a Friday photo post, but it’s Thursday and I’ll be on vacation tomorrow.)

A college friend stole this sign off a neighbor’s lawn and gave it to me in 1999 (good thing MoCo isn’t the DPRK). Of all the political lawn signs I’ve had, including a few from early Obama campaigns, it’s my obvious favorite.

There’s one passage in Death and Life where Jane Jacobs singles out the District for praise. Not surprisingly, it’s for the back streets of Georgetown, which (of course) house some of my favorite little eateries.

In city districts that become successful or magnetic, streets are virtually never made to disappear. Quite the contrary. Where it is possible, they multiply. Thus in the Rittenhouse Square district of Philadelphia and in Georgetown in the District of Columbia, what were once back alleys down the centers of blocks have become streets with buildings fronting on them, and users using them like streets. In Philadelphia, they often include commerce.

C&O Towpath at 31st St., with Sushi to Go. Baked & Wired, Il Canale, and Snap Cafe are around the corner.

The newly opened Sovereign lies just behind the 100% corner at Wisconsin & M, at the end of an unnamed alley. More retail is planned for the interior of this block, between M, Wisconsin, Prospect, and Potomac.

DC’s last privately-owned parking crater has a very unusual backstory. Gould Property owns the site free and clear, but only due to a land swap to get the Marriott Marquis built two blocks north. Gould had purchased part of the Marriott site back in the 1990s, when prices really were cheap enough to justify parking craters. The land basis and opportunity cost on this site is unusually low, especially since the former building on the site could not have remained.

Most surface parking lots are built as what zoning calls “an accessory use,” which means they’re an “accessory” to something else on the same lot. The parking lot at Sam’s Park & Shop in Cleveland Park or the Capitol’s parking lots, are “accessory” parking lots.

Parking craters, on the other hand, are usually not accessory parking directly tied to another land use; they’re paid parking lots whose owners are holding onto land that they speculate could be a future development opportunity. A parking lot requires minimal maintenance, but pays out some income in the interim. Most importantly, a parking lot is “shovel ready” — unlike a building with tenants in place, whose leases might or might not expire at the same time, a parking lot can be emptied and demolished on short notice when opportunities arise.

High rents and short buildings limit speculation

The opportunity that many “parking crater” developers are waiting for is the chance to build a big office tower. Offices pay higher rents to landlords than apartments (although in the best locations, retail or hotels can be even more valuable). However, the banks who make construction loans to developers rarely allow new office buildings to be built before a large, well-established company has signed a long-term “anchor tenant” lease for much of the new building’s space. If the building isn’t pre-leased, the result can be a bank’s worst nightmare: a “see-through tower” that cost millions of dollars to build, but which isn’t paying any rent.

Within downtown DC, robust demand and high rents mean that landowners face a very high opportunity cost if they leave downtown land or buildings empty for a long time. Instead of demolishing buildings years before construction starts, developers can make room for new buildings by carefully lining up departing and arriving tenants, as Carr Properties did when swapping out Fannie Mae for the Washington Post.

Less often, a developer will build new offices “on spec,” or without lease commitments in place. A spec developer usually bets on smaller companies signing leases once they see the building under construction. Downtown DC has a constant churn of smaller tenants (particularly law firms and associations) that collectively fill a lot of offices, but few are individually big enough to count as anchor tenants.

Because office buildings in DC are so short, they’re relatively small, and therefore the risk of not renting out the office space is not that high. In a city like Chicago, by contrast, few developers would bother building a 250,000 square foot, 12-story office building to rent out to smaller tenants. Instead, they could wait a few more years and build a 36-story building, lease 500,000 square feet to a large corporation, and still have 250,000 square feet of offices for smaller tenants.

While height limits certainly constrain the size of offices in DC, other cities with much less stringent height limits have also managed to eradicate most of their parking craters. Boston and Portland are similarly almost bereft of parking craters within their cores, not because of Congress but because other planning actions have maximized predictability and minimized speculation. In both cities, small blocks and zoning-imposed height limits of ~40 stories (!) encourage construction of smaller office buildings

Another factor common to these cities are policies also encourage non-car commutes — Boston even banned new non-accessory parking downtown — and rail transit that distributes commuters through downtown, rather than focusing access along a freeway or a vast commuter rail terminal. Metro’s three downtown tunnels, and DC’s largely freeway-free downtown, help to equalize access (and property values) across a wide swath of land. In retrospect, it’s impossible to identify which one factor had the greatest effect.

This customer is always right

There is one big anchor tenant in DC’s office market: the federal government. The government has some peculiar parameters around its office locations, which also help to explain where DC does have parking craters.

Private companies often don’t mind paying more rent for offices closer to the center of downtown, which puts them closer to clients, vendors, and amenities like restaurants, shops, or particular transit hubs. The government, on the other hand, has different priorities: it would rather save money on rent than be close-in. The General Services Administration, which handles the government’s office space, defines a “Central Employment Area” for each city, and considers every location within the CEA to be equal when it’s leasing offices. It also usually stipulates that it wants offices near Metro, but never specifies a particular line or station.

As rents in prime parts of downtown rose, the government began shifting leased offices from the most expensive parts of downtown to then-emerging areas. Large federal offices filled new office buildings in the “East End,” helping to rejuvenate the area around Gallery Place and eliminate many parking craters.

This one rule scattered “parking craters” all around DC, but they’re steadily disappearing

Over the years, DC noticed the success it found in broadening the federal government’s definition of the Central Employment Area, thereby spreading federal offices to new areas. It successfully lobbied GSA to widen the CEA further, encompassing not just downtown but also NoMa, much of the Anacostia riverfront, and the former St. Elizabeth’s campus. Because the latter areas have much cheaper land than downtown DC, and lots of land to build huge new office buildings, federal offices are now drifting away from the downtown core.

A developer with a small site downtown usually won’t bother to wait for a big federal lease: the government wants bigger spaces at cheaper rents. It’s easier to just rent to private-sector tenants. However, a developer with a large site within the CEA and next to Metro, but outside downtown, has a good chance of landing a big federal lease that could jump-start development on their land — exactly the formula that can result in a parking crater.

One recent deal on the market illustrates the point: the GSArecently sought proposals for a new Department of Labor headquarters. GSA wants the new headquarters to be within the District’s CEA, within 1/2 mile walking distance to a Metro station, and hold 850,000 to 1,400,000 square feet of office space.

The kicker is the timeline: GSA wants to own the site by April 2018, and prefers if DC has already granted zoning approval for offices on the site. It would be difficult for a developer to buy, clear, and rezone several acres of land meeting those requirements within the next two years, so chances are that the DOL headquarters will be built on a “parking crater” somewhere in DC. Somewhere outside downtown, but within the CEA, like:

The two blocks just west of the Wendy’s at “Dave Thomas Circle,” in the northwest corner of NoMa, are owned by Douglas Development and Brookfield Asset Management. Brookfield’s site could house 965,000 square feet of development, and Douglas’ site could have a million square feet.

High-rise residential seems like it would be an obvious use for land like the Yards, which is outside downtown but atop a heavy-rail station. Yet even there, where one-bedroom apartments rent for $2,500 a month, it’s still more valuable to land-bank the site (as parking, a small green area, and a trapeze school) in the hopes of eventually landing federal offices.

Many federal leases are also signed for Metro-accessible buildings outside the District, which helps to explain why prominent parking craters exist outside of Metro stations like Eisenhower Avenue, New Carrollton, and White Flint. (For its part, Metro generally applauds locating offices at its stations outside downtown, since that better balances the rush-hour commuter flows.)

One reform could fix the problem

One esoteric reform that could help minimize the creation of future parking craters around DC is to fully fund the GSA. Doing so would permit it to more effectively shepherd the federal government’s ample existing inventory of buildings and land, and to coordinate its short-term space needs with the National Capital Planning Commission’s long-term plans.

Indeed, GSA shouldn’t need very many brand-new office buildings in the foreseeable future. Federal agencies are heeding its call to “reduce the footprint” and cut their space needs, even when headcount is increasing. Meanwhile, GSA controls plenty of land at St. Elizabeth’s West, Federal Triangle South (an area NCPC has extensively investigated as the future Southwest EcoDistrict), Suitland Federal Center, and other sites.

However, ongoing underfunding of GSA has left it trying to fund its needs by selling its assets, notably the real estate it now owns in now-valuable downtown DC. GSA does this through complicated land-swap transactions, like proposing to pay for DOL’s new headquarters by trading away DOL’s existing three-block headquarters building at Constitution and 3rd St. NW.

In theory, it should be cheaper and easier for GSA to just build new office buildings itself. In practice, though, they’ve been trying to do so for the Department of Homeland Security at St. Elizabeth’s West — a process that Congressional underfunding has turned into a fiasco.

Parking craters will slowly go away on their own

In the long run, new parking craters will probably rarely emerge in the DC area. Real estate markets have shifted in recent years: offices and parking are less valuable, and residential has become much more valuable. This has helped to fill many smaller parking craters, since developers have dropped plans for future offices and built apartments instead.

A parking crater in NoMa that’s soon to be no more, thanks to apartment development.

Even when developers do have vacant sites awaiting development, the city’s growing residential population means that there are other revenue-generating options besides parking. “Previtalizing” a site can involve bringing festivals, markets, or temporary retail to a vacant lot, like The Fairgrounds, NoMa Junction @ Storey Park, and the nearby Wunder Garten. This is especially useful if the developer wants to eventually make the site into a retail destination.

Broader trends in the office market will also diminish the demand for parking craters, by reducing the premium that big offices command over other property types. Demand for offices in general is sliding. Some large organizations are moving away from having consolidated headquarters, and are shifting towards more but smaller workplaces with denser and more flexible work arrangements.

Unlike the boom years of office construction, there’s now plenty of existing office space to go around. Since 1980, 295 million square feet of office buildings were built within metro DC, enough to move every single office in metro Boston and Philadelphia here. While some excess office space can be redeveloped into other uses, other old office buildings — and their accessory parking lots — could be renovated into the offices of the future.

Quite a few universities have branch campuses in Washington, DC, but it seems like there isn’t a definitive list online. This seems odd: not only is higher education is one of the metro area’s largest non-federal industries, but in international economic development circles branch campuses seem just as highly sought after as corporate headquarters. After all, not everyone has the chance to import smart, motivated, mobile, impressionable kids from elsewhere during the most memorable years of their lives. Even if they don’t stay afterwards, there’s at least a chance to leave a good impression on future global leaders.

That’s why countries in Asia and the Middle East are spending lavishly to attract branch campuses of prestigious universities: Abu Dhabi and Shanghai both custom-built free campuses and gave cash grants to get NYU started there. NYC has also embarked upon the same effort through its three Applied Science Campuses.

Contrast that approach to here: NYU paid for its DC building through their own fundraising.* DC’s economic development officials have been dragging their feet for years on opening a college campus at St. Elizabeth’s, instead spending their time moving pro sports facilities there from elsewhere in the District. Not only is there not a concerted effort to attract or retain facilities, or the go-getter students who attend these campuses – there’s not even a list of these facilities. This seems like a missed opportunity.

So, crowdsourced by Jason Terry and his friends, universities that have a full-time physical presence within the counties traversed by the Beltway and that aren’t the locally headquartered members of CUWMA: